Bulletins

Insurance Bulletin, 3 December 2014

In this issue: Regulation and legislation; Market developments; Court cases and arbitration; HFW publications and events.

1. Regulation and legislation

1.1 French insurers and brokers challenge the effect of ACPR’s “recommendations” (France)

Three major insurer and broker associations, including the French Federation of Insurance Companies (FFSA), have recently filed an action before the French Conseil d’Etat (the Supreme Court for administrative matters). These associations seek the annulment of a “recommendation” made by the French Prudential Authority (ACPR).

Last July, the ACPR issued a “recommendation”, pursuant to the provisions of the French Monetary and Financial Code, relating to contracts between companies and intermediaries for the distribution of life assurance policies. Such contracts were already regulated by certain provisions of the Insurance Code. However, the ACPR considered that these provisions failed adequately to address the great diversity of situations in the context of life assurance distribution.

The ACPR therefore decided to issue a “recommendation” on good professional practices in this respect, to remedy the position.

The Market however, considered that this “recommendation” exceeded ACPR’s powers, since this sought to impose changes in current practice, whereas recommendations are supposed to be merely interpretative and non-binding. For this reason, these associations seek the annulment of this “recommendation”. The Conseil d’Etat’s ruling is eagerly awaited, not only because it should address the question of the limits and legal effect of such a recommendation, but also because it may give wider guidance as to the effect of such “soft law”.

1. Regulation and legislation

1.2 Insurers face ban on paying ransoms (England and Wales)

The Counter-Terrorism and Security Bill, which was published on Wednesday 26 November 2014, includes measures which, if the Bill were to pass into law, would make it a criminal offence for a insurer to make a ransom payment in response to a terrorist demand. Section 34(1) of the Bill will insert a new Section 17A into the Terrorism Act 2000, under which an insurer would commit an offence if it makes a payment under an insurance contract (or purportedly under it) in respect of any money or other property that has been, or is to be, handed over in response to a demand made wholly or partly for the purposes of terrorism.

Section 17A makes it clear that if an offence committed under it by a body corporate is proved to have been committed “with the consent or connivance of, or to be attributable to any neglect on the part of a director, manager, secretary or other similar officer of the body corporate” (or any person purporting to act in that capacity) then that individual, as well as the body corporate, is guilty of the offence and liable to prosecution and punishment accordingly. The Bill therefore opens up the possibility of individual as well as corporate criminal responsibility for ransom payments. The Bill expressly states however that these provisions will not apply to any insurance payment made in respect of money or other property handed over before 27 November 2014.

It of course remains to be seen whether the Bill will pass into law in its current form, or at all. Even if this were to happen, issues are likely to arise as to the Bill’s interpretation, for example, as to the precise meaning of the phrase “wholly or partly for the purposes of terrorism”, which brings a ransom within the scope of the proposed offence. However, the proposed ban on insuring ransom payments will of course be of significant interest to those currently underwriting, broking and purchasing kidnap and ransom insurance, of which reimbursement for ransom payments is a key feature.

1. Regulation and legislation

1.3 Risk Based Capital (RBC) regime expected to be introduced in Hong Kong in three to four years (Hong Kong)

In line with the International Association of Insurance Supervisor’s (IAIS)’s Insurance Core Principals (ICPs) 16 and 17, the Hong Kong government is looking to introduce an RBC regime. To this end, a government consultation is currently underway, which closes in mid-December.

The introduction of RBC is largely welcomed by the industry and seen by many as encouraging better risk awareness, in addition to being necessary to ensure regulatory equivalence. However, some details, such as how group wide supervision will work in practice (including how foreign insurer’s authorised in Hong Kong as branches will be treated), how captives will be treated and how RBC decisions by the regulator (including requiring add-ons or more capital) can be challenged, have yet to be ironed out.

The RBC regime foresees three pillars: quantitative requirements; qualitative requirements and disclosure (regarding the insurer’s capital, to the public). It is thought that international insurers who have already invested in preparing for Solvency II, especially those who have also addressed Pillar II, should be in a good position, but the process is still at an early stage.

For more information, please contact Caroline Thomas, Associate on +852 3983 7664 or caroline.thomas@hfw.com or your usual contact at HFW.

2. Market developments

Lloyd’s of London has granted China Re the right to own an underwriting syndicate, making it the first Chinese firm to hold this right in the Market’s 326-year history. China Re has previously run a special purpose syndicate (Syndicate 2088) jointly with Catlin, writing a whole account quota share of Syndicate 2003. This will be converted into a full syndicate with effect from 1 January 2014, allowing China Re to itself write insurance in the Lloyd’s market. It is understood that the relationship between China Re and Catlin will continue, with Catlin acting as managing agent for the China Re Syndicate.

Increasing its international focus and reach is a key part of the Lloyd’s Vision 2025 project. The China Re approval is the latest of a number of recent steps taken to advance this goal. Other such moves have included acquisitions involving Latin American and Middle Eastern interests, as well as the creation of special purpose syndicates backed by Indian and Malaysian insurers.

3. Court cases and arbitration

3.1 Insurer satisfies burden and avoids policy (England and Wales)

In the case of Genesisuk.net v Allianz Insurance Limited1, the claimant (G) sought to recover from the insurer (A) losses arising from a fire at its premises. A sought to avoid the policy on the basis (which G denied) that the fire had been deliberately set or procured by a Director of G. The precise legal basis of the policy avoidance is not apparent from the judgment, although a policy (rather than simply a claim) may be avoided in cases of fraud, either pursuant to a policy term, by operation of the common law rule to this effect, or by virtue of a breach of the continuing duty of utmost good faith.

The court held that A bore the burden of proof and that the test was the balance of probabilities “commensurate with the gravity of the charge”. Proof of motive is not a conclusive factor, but will be persuasive. It is not necessary to produce a seamless proof or “smoking gun”. Inferences will be used to fill gaps, so long as there is some credible evidence and ambiguities are not fatal. If there is sufficient unambiguous evidence against him, the insured’s previous reputation and respectability will not save him from adverse judgment.

Applying these principles and on the basis of the evidence before it, the court was satisfied that overall A had shown to the required high standard that G’s Director, or someone acting on his behalf, had deliberately caused the fire. A was therefore entitled to avoid the policy. The case is a useful reminder of the principles that the courts will apply in deciding such questions.

4. HFW publications and events

HFW has published a Briefing on the Government’s new Counter-Terrorism and Security Bill, which was announced at the end of November. The provisions of the Bill, which are of particular relevance to the insurance market, are those which aim to prevent insurers from covering or reimbursing ransoms paid to terrorists by assureds.